Greg Wojciechowski examines how the Bermuda Stock Exchange has built on its reputation and consolidated its world class reputation.
BSX – 40 Years in the Making
The Bermuda Stock Exchange (BSX), which began life in 1971 as a domestic equities market, is now the leading, fully electronic, offshore securities market. In 1992 the company was restructured into a demutualised, for profit entity and today the BSX specialises in listing and trading of capital market instruments such as equities, debt issues, funds, hedge funds, derivative warrants and Insurance Linked Securities.
The BSX, recognised by the US SEC as a Designated Offshore Securities Market, is a member of the World Federation of Exchanges and is located in an OECD member nation. The BSX has Approved Stock Exchange status under Australia’s Foreign Investment Fund (FIF) taxation rules; Designated Investment Exchange status by the UK’s Financial Services Authority; Recognised Stock Exchange by the UK HM Revenue and Customs; Designated Exchange status under Canada’s Income Tax Act and is a member of America’s Central Securities Depository Association.
Its significant growth over the last number of years is due in large part to the company’s innovative and flexible approach. In addition to taking a leading role in what has become a world trend towards profitability and demutualisation, the Exchange has sought to create unique products and services for its niche offshore market.
A case in point is the Exchange’s ‘Mezzanine Market’, a unique pre-IPO market listing for start-up, high growth potential companies. Unlike AIM and other markets offering similar capital market support services, the BSX Mezzanine Market offers development stage companies the opportunity to list on a recognised international stock exchange without having to commit to a full IPO. This is due in large part to the fact that the BSX restricts Mezzanine Market investment to ‘Qualified Investors’. This means that access is limited to institutional and or sophisticated investors only in this way, the BSX can rely more on full disclosure than prescriptive regulations for investor protection purposes.
In addition to the Mezzanine Market the BSX supports an active domestic market that trades daily, Monday through Friday and a robust after-hours crossing market for large institutional block trades. It is one of the world’s leading listing facilities for offshore funds and alternative investment vehicles and supports niche markets for specialised insurance and debt products.
Trading on the BSX is executed through the Exchange’s customised trading system, BEST (Bermuda Electronic Securities Trading), a fully automated system based on a central limit order book which allows Trading Members to trade both equity and fixed income securities on an equal, real-time ‘first come, first served’ basis. Once executed, trade information is disseminated electronically to key financial information providers Bloomberg and Reuters for worldwide distribution. Thus creating a transparent, liquid and global market for Bermuda.
At the close of 2001 the BSX introduced the final phase of its electronic build out with the introduction of the ‘Bermuda Securities Depository’ (BSD), Bermuda’s national securities depository. The move is a natural progression for the Exchange, which is committed to meeting and exceeding international securities market standards. Since the late 1980s the introduction of a central securities depository and shorter settlement cycles have been universally acknowledged as the best way to reduce risk and make securities markets more efficient. Another contributing factor to the Exchange’s success is the BSX’s regulatory environment which makes it conductive to new and innovative product listings, especially ‘institutional only’ securities.
The BSX is bound neither by European Union Listings Directive, nor United States Securities Exchange Commission (SEC) regulations. However, as a full member of the World Federation of Exchanges (WFE) the BSX has been acknowledged by its peers to meet the highest regulatory and operational standards.
BSX in 2011
Having set itself the objective in 2010 of firstly raising the profile of Bermuda and its exchange and secondly, attracting more ILS to the island, the Bermuda Stock Exchange has been more than satisfied with what it has managed to achieve in the two years since. By the end of 2011 the Bermuda Stock Exchange had for the first time reached over US$3 billion in listed Cat Bonds and ILS securities on the exchange.
As of 31 December 2011 the BSX was able to report that 25 ILS were listed on the exchange with a total value of US$3.373 billion. The BSX has been working hard to promote itself as the go-to listing destination for ILS and cat bonds and thanks to legislative changes made by the Bermuda Monetary Authority to make the island a more attractive domicile for these securities, the efforts seem to be working.
Of the 25 listed insurance linked securities on the BSX, four are securitisation programs, 13 are notes issued under these programs, six are tranches of ILS notes notes issued as stand-alone securities and two are specialist exchange trade fund classes.
The momentum has been driven largely by the BMA’s revised regulations, which in late 2009 established a new designation for ‘special-purpose insurers’ (SPI) as part of its supervisory scheme. This has been a very positive step for SPIs setting up in Bermuda wanting to issue ILS such as catastrophe bonds, and Bermuda been able to offer them the option of listing these ILS on the exchange.
According to the Bermuda Monetary Authority, 23 special-purpose insurers were formed in Bermuda during 2011, with the majority of these formations created specifically to issue catastrophe bonds or create sidecars. In 2010, 10 were formed during the same period so clearly the push to attract this business to the island is working.
Bermuda is the world’s third largest reinsurance market and is already home to over 1000 insurance companies with total assets of US$442 billion, and is a natural place for setting up ILS. Many of Bermuda’s reinsurance companies have issued cat bonds or established special purpose vehicles such as side cars – there is an historical interest and base of knowledge in these security structures.
The BSX is working to expand its support of these products by leveraging its fully electronic stock exchange platform. Institutional investors such as pension and dedicated investment funds are interested particularly in ILS because of the low correlation between ILS and broader capital markets. ILS are a natural hedge to global capital markets, and listing on the Exchange provides investors more security while providing the structures with more transparency and visibility.
In Bermuda, there is also a critical mass of insurers and reinsurers, the infrastructure to deal with them, and the rigorous regulation from the Bermuda Monetary Authority and the Bermuda Stock Exchange.
Building Relations with Canada
In October the Minister of Finance for Canada approved the addition of the Bermuda Stock Exchange to the list of designated exchanges under the Income Tax Act (Canada). This represented yet another significant development for the BSX in Canada and followed the signing of the Tax Information Exchange Agreement (TIEA) between Bermuda and Canada in July.
In 2005, the Canadian Government removed the foreign content limit on tax-deferred retirement plans, prompting an increasing number of Canadian investors to look to foreign securities listed on foreign exchanges to enhance their returns and diversify the investments held in their Canadian Registered Retirement Savings Plans (‘RRSPs’) and Deferred Profit Sharing Plans (‘DPSPs’). The addition of the BSX to the Designated Stock Exchange list now opens up the opportunity for Canadian investors to include BSX listed securities in the investment portfolios of their RRSPs and DPSPs.
Whilst the Designation status is not an endorsement or recommendation of individual securities listed and traded on the BSX, it is an acknowledgement by the Minister of Finance for Canada that these securities trade on a well governed, regulated and transparent market, which allows them to be qualified investments for tax-deferred retirement plans in Canada.
This was followed in December by the announcement by BSX that that TMX Group had purchased a 16 per cent minority stake in the BSX. TMX Group is now one of the largest shareholders of the BSX, and Tom Kloet, CEO, TMX Group, will be joining the BSX board of directors.
Canada and Bermuda share a long history and important jurisdictional ties and this strategic investment can only serve to strengthen the long standing relationship.
While all these initiatives, products and recognitions go a long way to explaining the Exchange’s steady growth, they do not tell the whole story. Location, a world-class reputation and the flexibility to move rapidly with the times have also contributed significantly to the Exchange’s success to date.
Gregory A. Wojciechowski
Greg Wojciechowski is President and Chief Executive Officer of the Bermuda Stock Exchange (BSX). He is also, the Chairman of the Financial Intelligence Agency in Bermuda, past-Chairman of ILS Bermuda Ltd. and sits on the Board of Directors of the World Federation of Exchanges (WFE) and the Bermuda Business Development Agency (BDA). Prior to assuming the role of President and CEO in January 2002, Greg Wojciechowski was the Exchange’s Chief Operating Officer. In this capacity, he was responsible for the development of the Exchange’s regulatory and operational infrastructure as well as the day to day running of the Exchange. Prior to joining the Bermuda Stock Exchange in 1993, Mr. Wojciechowski, over a period of several years, held management positions at three large U.S. brokerage firms. During this time his attention was focused on brokerage administration and operations in the global equity and fixed income capital markets. Mr. Wojciechowski was educated in the U.S. and received a Bachelor of Arts degree from the University of North Carolina at Charlotte. He has studied International Business at The University of Copenhagen under Denmark’s International Studies Program and has studied French and International Relations at the Universite D’Aix-Marseille (Institut Pour Etudiants Etrangers) in Aix-en-Provence France. In 1998 Mr. Wojciechowski attended and completed the Young Managers Programme at INSEAD in Fontainebleau, France.